Facebook's Headwinds Stand Out More Than Its Great Growth

Earnings season is in full swing and Facebook Inc. (NASDAQ: FB) has been in the news over censorship and antitrust issues in recent days. The world’s key leader in social media has released its earnings for the third quarter of 2020. The social media giant reported earnings of $2.71 per share and $21.47 billion in revenues.

The consensus estimates from Refinitiv were calling for $1.91 in earnings per share (EPS) on $19.82 billion in revenue. These are massive beats over the expectations, but the earnings per share item has some benefits that were included.

Where things get choppy is looking ahead. Facebook did note that it expects U.S. and Canadian daily active users to be down to flat in the fourth-quarter versus this last report.

The company still sees ad revenues to grow faster in the coming quarter than in this last report.

And for 2021, Facebook sees more significant targeting and measurement headwinds in place. The company also noted that it continues to face a significant amount of uncertainty. Some additional guidance from the release was shown below:

  • Fourth quarter 2020 year-over-year ad revenue growth rate to be higher than our reported third quarter 2020 rate, driven by continued strong advertiser demand during the holiday season.
  • Oculus Quest 2 orders have been strong which should benefit the “other” revenue.
  • 2020 total expenses to be in a range of $53 billion to $54 billion, narrowed from a prior range of $52 billion to $55 billion.
  • 2021 total expenses will be in the range of $68 billion to $73 billion.
  • Expect fourth quarter 2020 effective tax rate to be in the mid-teen rates and full-year 2021 tax rate to be in the high-teens.

Facebook is joining in on the company’s paying very low taxes. Its effective tax rate was 4% in the third quarter of 2020. The release did note that the tax rate reflected a one-time income tax benefit of $913 million related to the effects of a tax election to capitalize and amortize certain research and development expenses (for U.S. income tax purposes). Excluding this tax benefit, Facebook’s effective tax rate would have been 11 percentage points higher and our diluted earnings would have been $0.31 per share lower.

Analysts and investors remain focused on Facebook’s user growth numbers. The daily active users were 1.82 billion on average in September 2020, up 12% year-over-year. Facebook monthly active users of 2.74 billion was a gain of 12% year-over-year.

The company is still aggressively hiring. Its headcount was 56,653 as of September 30, 2020, up 32% year-over-year.

Facebook founder and CEO Mark Zuckerberg said of the quarter:

We had a strong quarter as people and businesses continue to rely on our services to stay connected and create economic opportunity during these tough times. We continue to make significant investments in our products and hiring in order to deliver new and meaningful experiences for our community around the world.

Shares of Facebook closed up 4.9% at $280.83 ahead of earnings, and its shares had been fighting between positive and negative in the after-hours. Facebook had a $296.17 consensus analyst price target coming into the earnings report, but analysts had been raising their price targets in the weeks ahead of the report.